Samsung Needs More Outside Customers for its Chips and Panels Amid Mobile Slump

As Samsung Electronics Co Ltd sells fewer of its own smartphones, the South Korean group's components businesses are under pressure to pick up the slack and secure external customers for chips and display panels, including putting these in rival mobile devices.

Samsung Display has begun supplying organic light-emitting diode (OLED) panels to Chinese smartphone makers Lenovo, Coolpad, Oppo Electronics and Vivo Electronics. And the subsidiary says it's on the lookout for more clients, aiming to have half its total revenue by 2017 from sales to outside customers, up from just over a third in 2013.

Industry officials estimate that external clients account for around a fifth of Samsung Display's sales of smaller smartphone and tablet panels compared to about 50 percent for large panels for TVs, underscoring a need for more mobile clients.

"Samsung Display's desire to grow overseas sales wasn't as strong when Samsung Electronics' Galaxy S devices were selling well, but now it's trying to avoid being too over-reliant on a single client," a person with direct knowledge of the matter told Reuters.

Samsung's systems chips business is also trying to grow its customer base following a weak 2014. Some analysts say the business lost more than $1 billion (roughly Rs. 6,208 crores) last year on declining sales of Galaxy smartphones and the loss of a contract to supply the processor for Apple Inc's iPhone 6 (Review | Pictures).

Samsung's next Galaxy S smartphone is widely expected to be powered by its own Exynos processor chips after Qualcomm Inc acknowledged that a key customer won't use its Snapdragon mobile chip in a flagship device.

Samsung has declined to comment on that, but another individual familiar with the matter said the proportion of next-generation Galaxy S phones powered by Exynos chips will likely increase from previous versions.

A successful launch of the new device could help win more external orders, and bolster profits. Samsung said late last month it was in talks with third-party customers about supplying its Exynos mobile processors.

"Some of Samsung's components businesses and other affiliates were too dependent on the captive (in-house) market," said IM Investment analyst Lee Min-hee. "There's been a general shift in direction, with the businesses looking to make external sales and diversify the customer base."

Weak mobile business
Samsung's mobile profits for October-December dropped 64 percent from a year earlier, as Galaxy S5 (Review | Pictures) sales disappointed and rivals like China's Xiaomi Inc became increasingly competitive. Analysts don't expect any smartphone turnaround as margins remain squeezed.

Nomura and other brokerages, though, have raised their 2015 earnings forecasts for Samsung, betting on improved contributions from component sales. As smartphone competition heats up, Samsung should benefit from better demand for components such as chips and panels.

The system chip business in particular is expected to be a catalyst. Local media reports and analysts say Samsung is likely to win back the Apple contract and supply the majority of mobile processors for the next iPhone.

Display sales, too, should provide an additional boost this year as the business expands its external customer base. Daewoo Securities tips 2015 operating profit to more than double to 1.7 trillion won ($1.55 billion, roughly Rs. 9,622 crores) from last year.

"We're starting to hear talk that Samsung's annual profit could actually increase this year, contrary to the market consensus before the fourth-quarter results were announced, and I think that will be the case as well," said Park Jung-hoon, a fund manager at HDC Asset Management, which holds Samsung shares.

© Thomson Reuters 2015